Early Signs of Bankruptcy and Their Progression

Before any bankruptcy filing, there are copious early signs and warning that debt is becoming so serious that it may soon turn into an unmanageable personal deficit. It is very rare indeed that debt becomes so staggering overnight that immediate insolvency relief is required for adequate personal debt management.

Generally speaking, there are five early signs of becaming bankrupt that consumers should be aware of:

1. Debtors access one credit account and withdraw cash to pay another. Known colloquially as “robbing Peter to pay Paul,” this use of credit is no longer a means for consumer purchases or coverage of emergency bills, but instead the credit accounts are treated as everyday budgeting tools. This is one of the first signs that financial trouble is on the horizon.

2. The next sign that hints of a potential bankrupt is the effort to incur further credit accounts. These are required to maintain the debt payments that are no longer covered by using already available credit. Before long, the amount of outstanding debts becomes so severe that there are no sufficient assets left in the debtor’s possession to cover the payments.

3. Debt collector harassment is the next sign that a bankruptcy may be required. Debt collectors are agents of the various creditors with which the consumer has contracted for the use of loans and credit products, and when repayment is not made in accordance with the requirements of the loan agreements, these agents have the legal right to contact the debtors. Consumers with a number of outstanding accounts are quickly left feeling anxious, embarrassed, and harassed, and it is only a matter of time before the consumer will seriously consider insolvency for relief from debt collection efforts.

4. An informal debt negotiation or settlement fails. Savvy debtors will seek out the help of credit counselors, and in so doing learn not only how to manage their funds, but also how to negotiate with creditors. At times these negotiations bear little fruit, and the creditors may refuse to work out payment options that vary from the initial contractually agreed upon rates, amounts, or dates. In these cases a debtor may feel that s/he has no choice left but to appeal to the courts for protection under the Bankruptcy Act.

5. A formal debt agreement or personal insolvency agreement fails. The last but most certainly grave sign  is the failure of a formal debt settlement effort. These efforts are governed by the Bankruptcy Act, and if they fail, there is little recourse left for the consumer but to seriously consider becoming bankrupt.